S-Oil: Lower Bids, Inflated Prices

S-Oil agreed to pay $12,980,000 to resolve civil claims over fuel bid rigging for U.S. military bases in South Korea. The government’s complaint described a scheme with an unusual twist: S-Oil and its logistics partner allegedly undercut the other suppliers’ agreed prices while still charging more than competition would have produced. A bid could beat the other bids and still overcharge the military.

The Justice Department announced S-Oil’s civil resolution alongside Hyundai Oilbank’s on March 20, 2019.

One Civil Payment Across Two Claims

S-Oil’s payment under its False Claims Act agreement would also settle the government’s civil antitrust claim in full. The court papers put the same amount in both agreements and credited the False Claims Act payment against the antitrust claim.

The Justice Department said S-Oil’s civil amount exceeded its own overcharge. The alleged harm was straightforward: taxpayers paid inflated prices for fuel the military needed to run vehicles and heat buildings.

How S-Oil Fuel Bid Rigging Worked

The government alleged that suppliers divided delivery locations among themselves and used deliberately high bids to protect those allocations. S-Oil entered that arrangement with Hanjin Transportation for the military’s fuel procurement round in 2009.

The business relationship explains how the bidding worked. S-Oil, an oil refiner headquartered in Seoul, supplied gasoline, diesel, kerosene and other petroleum products. Hanjin acted as the prime contractor and provided transportation and logistics. The supplier of the fuel and the company holding the government contract were different businesses.

Each Delivery Location Had Its Own Price

The Defense Logistics Agency’s Post, Camps, and Stations contracts bought fuel for military vehicles and building heat. Its solicitations listed delivery locations separately, and bidders offered prices for the locations they wanted. After the agency reviewed the initial bids, bidders could submit revised final bids. The agency awarded each line item to the lowest bidder.

According to the government’s complaint, meetings, phone calls and emails between late 2008 and mid-2009 allocated those line items before the awards. Existing participants agreed to give Hanjin and S-Oil some locations previously reserved for themselves. Companies bidding on someone else’s allocated location agreed to bid high enough to lose.

That put the decision in the suppliers’ hands before the government compared their offers. The buyer could follow its lowest-price rule while the bidders had already decided which prices it would see.

Bidding Below the Other Suppliers

For the 2013 procurement round, the complaint alleged that suppliers again communicated about prices and allocations. Hanjin and S-Oil then submitted bids below the prices the others had agreed on. The government described why that apparent price competition still cost the military:

The complaint alleged that the partners won nearly all the line items, with S-Oil providing fuel and Hanjin providing transportation and logistics. According to the complaint, the Defense Logistics Agency made inflated payments under those contracts through October 2016.

The alleged advantage was knowing how high the other suppliers would bid. S-Oil and Hanjin could take business from them without giving the military the price that independent competition would have produced.

The Fuel Supplier Changed After the Award

The government’s complaint also alleged a later agreement that changed who would supply some of the fuel. After the awards, Hanjin, S-Oil and GS Caltex agreed that GS Caltex would supply Hanjin on certain line items originally assigned to S-Oil.

Hanjin would pay GS Caltex much less than it had agreed to pay S-Oil for that fuel. Even that lower supply price, the complaint alleged, exceeded a competitive price.

Before S-Oil’s later supply change, Hyundai Oilbank and its logistics partner allegedly redirected an accidental award’s fuel business to GS Caltex; see Hyundai’s case.

The complaint’s account gives the supply records a purpose beyond confirming delivery. An award shows which bidder won. The later purchasing arrangement can show how the companies preserved or revised their allocation of the business. Someone who knows why a fuel supplier changed may understand a decision the bid table never explains.

The Criminal Charge and the Civil False Statements

In its announcement of the criminal case, the Justice Department said S-Oil had agreed to plead guilty to an antitrust charge. The indictment charged the companies with suppressing competition in fuel bidding and conspiring to obstruct the government’s procurement process.

The same indictment separately charged company associates, managers and executives with participating in the bid-rigging and procurement-fraud conspiracies.

The civil case reached the government’s fuel bill. The government alleged in the civil case that the Department of Defense paid substantially more than it would have if the suppliers had competed. The Justice Department’s announcement said the False Claims Act agreements addressed alleged false statements to the government connected to the agreement not to compete.

For a procurement insider, that connects decisions inside the bidding business to the money leaving the government. The line-item allocation explains whose bid was supposed to win. The submitted offer and statements to the buyer connect that arrangement to the contract and its payments.

A Whistleblower Case Behind the Civil Settlement

The Justice Department said its civil investigation resulted from a qui tam case under the False Claims Act. S-Oil’s settlement agreement describes a whistleblower who alleged that the company joined other South Korean suppliers in rigging military-fuel contracts, including the procurement rounds described above.

How Is Bid Rigging Detected?

Bid rigging is detected by connecting suspicious bidding patterns with evidence of what the suppliers agreed to do. In S-Oil’s case, the government’s complaint connected the prices and awards with alleged phone calls, emails, allocations and later supply agreements.

Applied to these fuel allegations, the bid results show who won the locations. Knowledge of the allocation discussions explains why losing bidders chose their prices. Knowledge of purchasing explains why a different refiner supplied fuel after the award. These are connections across the bidding and supply business, and an insider may know one of them well enough to change how the others are understood.

How Much of a Settlement Does a Whistleblower Get?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know How the Fuel Bid Was Built

If a fuel bid beat the other offers but still reflected agreed prices, explain the refinery and logistics decisions to our whistleblower experts.